Jul 29 The Oil Sands Weekly

Clean up continues on the North Saskatchewan River . . .

Husky Energy has updated its initial incident report, clarifying confusion over the time span between when the pipeline rupture may have occurred and how long it took the company to respond:

According to Husky, several abnormal pressure alarms came through while re-starting a segment of piping within their Saskatchewan Gathering System, which transports diluted heavy oil to the Llyodminster Upgrader.

Crews were dispatched but no leak was found Wednesday evening.

The pipe was shutdown and isolated overnight and an aerial team was organized on Thursday morning to survey the length of the pipeline.

A sheen was discovered early Thursday morning on the North Saskatchewan River, just upstream of North Battleford, SK.

Husky's instrumentation and control systems estimates the leaked volume to be at most 250 m³ (or 1,570 barrels).

Clean-up efforts are focused on shoreline up to 20 km downstream of the leak, where the majority of the oil appears to have spilled. However, the fast moving river has moved the oil slick as far as 500 km away, now impacting the town of Prince Albert, SK and its 35,000 residents. At least 40% of the oil was recovered at last estimates, but heavy rains have made sub-surface recovery very difficult.

Husky officials noted that the northern part of the 19-year old Saskatchewan Gathering Pipeline will remain out of service until the incident is fully resolved. The company did not confirm whether heavy thermal oil production in Saskatchewan would be impacted.

Husky has apologized for the leak and promised to cover the costs of remediation and lost revenues for local businesses affected by water shortages. The company has also reactivated its Twitter account and is providing updates both on its website and through social media.

Imperial struggles to turn a profit despite boosting production . . .

Imperial Oil reported a second quarter loss of $181 million, its second quarterly loss in a row. About $170 million of that loss was attributed to the wildfire outages. Kearl production was periodically halted in May due to constraints on both inbound diluent and outbound production pipelines. Among the key highlights for Q2:

Cash flow from operations rose to $443 million, up from $377 million in the previous year. The Alberta wildfires cut cash flow by $195 million.

Total revenues fell 14.4% to $6.25 billion versus the same time last year.

Kearl production averaged 155,000 bbl/day for the quarter, up from 130,000 bbl/day in Q2/2015. Excluding wildfire disruptions, production at Kearl would have increased 13% y/y.

Cold Lake bitumen production averaged 163,000 bbl/day, up from 161,000 bbl/day for the previous year. Base operations declined slightly while Nibiye production was improved.

Refinery throughput averaged 246,000 bbl/day in Q2, compared to 373,000 bbl/day last year. The company completed major maintenance turnarounds at both its Strathcona and Nanticoke operations during the last quarter.

Capital expenditures continue to decline, falling to $335 million, a decrease of $484 million from Q2/2015 thanks to the completion of several major projects.

Imperial says the business environment in the energy patch remains "challenging" and management will remain focused on reducing operating costs and avoiding any unecessary discretionary spending.

Imperial also noted its Mackenzie gas project regulatory approval has been extended by seven years, giving it up to 2022 to start construction. The company says it will evaluate whether it still wants to invest in the natural gas market but did not provide a timeline for a final investment decision. The NEB's decision to extend the project's sunset clause is subject to approval by the federal government.

Suncor books a huge Q2 loss on 20 million barrels of lost production . . .

The May wildfires took a huge bite out of Suncor Energy's second quarter results, which came in way below analysts' expectations. The company reported a sizeable net loss of $735 million in Q2, versus a gain of $729 million for the previous year quarter.

Shutdown of their oil sands operations took 20 million barrels of oil out of its second quarter production numbers. The company also completed planned maintenance turnarounds at its base plant upgrader and refineries in Montreal, Sarnia and Commerce City, CO.

Construction at the Fort Hills Project was disrupted for about a month due to the wildfire evacuations. However, the project remains on track for a late 2017 start-up. Suncor is expected to give an update on construction and engineering progress by the end of the year.

The company expects to achieve $750 million in savings this year relative to its original 2016 capital budget and has also placed its Petro-Canada lubricants business for sale. A deal is expected to be announced within the next 12 months.

CEO Steve Williams says his company is open to "strategic growth opportunities" but doesn't see any major projects being sanctioned anytime soon.

The Alberta Energy Regulator (AER) also reported that 125 barrels of diluent were spilled on a pipeline that transports diluent from Suncor's base plant to the Firebag SAGD facility. The spill allegedly occurred near the base plant. Suncor did not comment on the matter except to say there would be no impact on operations.

MEGEnergy reported a bigger-than-expected quarterly operating loss of $98 million this week, despite record production and record low operating costs. Second quarter production rose to 83,127 bbl/day, with May and June numbers expected to top 86,000 bbl/day. Operating costs have declined to a record low $7.43/bbl.

For the full year 2016, the company expects to produce an average of 80,000 to 83,000 bbl/day at an operating cost range of $6 to $7/bbl. The company reported a net loss of $146 million in the second quarter. Revenues declined 8% to $513 million.

Despite not being able to turn a yearly profit since 2012, the company plans to divert up to $30 million in operating cost savings to its capital spending program, all in an effort to expand production to as much as 120,000 bbl/day. The stock declined sharply on the news, as investors signalled they'd rather see those savings redirected towards reducing debt.

Aggressive cost-cutting and strong production numbers helped reduce second quarter losses at Cenovus Energy. The company posted a net loss of $267 million versus a profit of $126 million for the prior year quarter. Cenovus says about two-thirds of its cost cuts are sustainable over the long term. The company paid out about $19 million in severances so far this year.

CEO Brian Ferguson suggested the company might soon restart construction activities on its phase G expansion at Christina Lake, which was put on hold over a year ago. However, Ferguson wants additional clarity from the federal government on regulatory uncertainties, including climate change policies. A go/no-go decision on phase G is expected by December.

The company has already started rebidding contracts for Christina Lake and is expected to revise its 2017 capital budget by December. Second quarter production averaged 198,080 bbl/day, roughly unchanged from last year. A 9% gain in oil sands production (to 142,604 bbl/day) mostly offset a 20% decline in conventional output (falling to 55,476 bbl/day). Cenovus presently has a cash reserve of about $3.8 billion.

Canadian government accelerates plans to ban old rail cars from crude transport . . .

Transport Minister Marc Garneau has ordered the retirement of all DOT-111 railcars by November 1st, 6 months earlier than planned. The government estimates there are 28,000 DOT-111 railcars being used to transport goods across the Canada/US border. Neither CN nor CP Rail have any old rail cars in crude service but US rail companies transporting crude in DOT-111 cars will not be allowed to enter Canada. The US Department of Transport has also ordered the phase-out of DOT-111 tankers for hazardous materials but that regulation doesn't take effect until next year.

Enbridge CEO remains optimistic on Northern Gateway . . .

About 10% of Northern Gateway is owned by a group of First Nations and Metis communities known as The Aboriginal Equity Partners. Enbridge has committed to increasing that stake to 33%, giving its aboriginal partners an equal voice on project governance.

Monaco estimates about 700,000 bbl/day of new capacity will be needed to accomodate production growth from the oil sands over the next 4 years. The company plans to add up to 80,000 bbl/day of capacity by September by adjusting its crude slates and has also completed a 70,000 bbl/day expansion of Line 6B on the Lakehead System. Enbridge has over $26 billion worth of projects on the books and is awaiting a decision from the federal government on its Line 3 replacement sometime this fall.

Enbridge reported a $301 million second quarter profit this week, down sharply from $577 million for the same quarter last year. Cash flow from operations was cut in half to $868 million.

Canada's largest pipeline company was hit hard by the Fort McMurray wildfires, when many of its diluent and product pipelines were either taken out of service or running way below capacity. Enbridge's Cheecham Terminal near Fort McMurray was also shut down for much of May as a precautionary measure.

Carbon taxes, power contracts and the NDP government . . .

Alberta's NDP governmenthas taken legal action over the recent cancellation of power contracts by several companies, challenging the "profitability" loophole in the power purchase agreement (PPA).

PPA regulations allows companies to terminate contracts if the government makes legislative changes that reduces the profitability of a contract. Enmax, TransCanada, AltaGas and CapitalPower all terminated their power contracts after the government introduced carbon levies on large emitters. The province maintains the contracts were already unprofitable due to low power prices.

Cancellation of the power contracts has left Alberta's taxpayers on the hook for approximately $2 billion over the next 4 years. Adding insult to injury, the government has spent $100,000 on an ad campaign to explain the lawsuit to Albertans.

Elsewhere in the Canadian energy patch . . .

Real-estate analytics firm Altus Group is warning that Calgary's office vacancy rate is now over 20%, a level not seen since the 1980s. There is currently 14.2 million square feet of office space available in Calgary, with 8 buildings almost completely empty. The city's vacancy rate hit a low of 1.2% a decade ago, sparking a huge construction boom in the commercial real-estate market. Over 30% of additional office space has been added over the past 11 years.

Piping supplier Evraz has laid off 125 workers in Regina blaming delays in pipeline approvals and cheap Chinese imports. The company de-staffed 90 employees in Regina and 260 in Calgary just a few months ago. Evraz has committed to bringing back employees when conditions improve.

Encana has filed for Mixed Shelf offerings worth US$6 billion, including shares, warrants and bonds. The company will use the proceeds to pay for its capital expenditures and reduce debt.

This week's Canadian economic data . . .

Statistics Canada reported another 1.1% m/m decline in Alberta wages for the month of May, now down 3.7% for the year. Professional and technical workers saw their paycheques drop another 1.3% m/m in May, bringing the 12 month decline to 3.2%. Overall in Canada, wages increased 0.2% in May, bringing the yearly gain to 0.9%.

Canadian GDPcontracted 0.6%, the steepest one month decline since 2009. Production outages near Fort McMurray dropped non-conventional oil extraction by 22%, which was largely expected. However, the wildfires had a trickle-down effect across other sectors:

utilities and natural gas distribution also declined due to the production outages.

Excluding the oil sands production outages, the economy still contracted 0.1%.

Apart from problems in the energy patch, the Canadian economy is also being impacted by a weak US economy. US GDP rose just 1.2% in the second quarter, far short of the 2.6% most economists were expecting. Q1 GDP was also revised lower to just 0.8%. Consumer spending remains strong but corporate spending contracted 2.2% y/y. Residential and government spending also contracted.

The Bank of Canada expects the Canadian economy to rebound sharply in the third quarter, to an estimated 3.5%.

This week's other "blame Alberta" news . . .

Intact Financial reported an almost 50% drop in earnings due to $127 million in payouts related to the Fort McMurray wildfires. Intact estimates total claims for the insurer will be $409 million but most of that amount is reinsured by an underwriter. Personal claims made up about two-thirds of the estimated losses.

Despite flying a record number of guests, Westjet blames the downturn in the energy patch for putting downward pressure on airline fares. The company reported a 40.5% decline in second quarter net earnings to $36.7 million.

Beijing-based CNOOCtelegraphed this week it will report a US$1.2 billion loss for the first half of 2016, its first 6-month loss since 2000. The company is expected to take a big write down on its Long Lake asset, whose upgrader was recently shutdown indefinitely. CNOOC paid US$11.4 billion for Nexen Energy in 2013.

API wants Americans to vote for "energy" . . .

In an interview with Bloomberg, American Petroleum Institute (API) VP Louis Finkel wants Americans to vote for "energy" at the next presidential election and criticized the Democrats for not doing more to support the energy sector. API estimates that 69% of American voters would like to see more domestic oil and gas production and would like to see natural gas play a bigger role in America's energy equation.

Finkel also took offence at a recent speech given by President Obama, where he took credit for reducing foreign oil imports into the US. Finkel pointed out that most of the recent increases in domestic oil production has come from private lands, not federal.

The Democrats have shifted their platform from wanting to be a global energy powerhouse 8 years ago to being decidedly anti-fossil fuels. Hillary Clinton has promised to further crack down on offshore drilling, fracking and oil exploration on federal lands, if elected. However, Finkel stopped short of supporting Donald Trump and reiterated that API is non-partisan.

ExxonMobil eyeing new investments . . .

ExxonMobil's chemicals division and SABIC (Saudi Basic Industries Corporation) are evaluating the development of a jointly owned petrochemical complex in the Gulf Coast. The complex would be located either in Texas or Louisiana near abundant NGL feedstock. A final investment decision is expected by the middle of 2017. SABIC's CEO is confident the project will get the green light.

Exxon also announced it will be expanding ultra-low sulphur diesel and gasoline production at its Beaumont Refinery by 40,000 bbl/day. The engineering contract for the expansion was awarded to Houston-based Bechtel.

Other global energy news . . .

About 400 workers on Shell's North Sea oil rigs have commenced strike action this week, threatening full work stoppages in the weeks to come. Unions are protesting deep job cuts, noting the oil company made oodles of cash when times were good and it's payback time for employees. This is the first strike in 28 years in the North Sea, which is one of the highest cost oil basins in the world. Shell called the strike action "highly regrettable" and "counter-productive" but also noted that members participating in the strike are non-essential and will have no impact on production.

Norway-based Statoil has purchased a 66% interest in PetroBras' Santos basin for US$2.5 billion. Statoil has several assets off the coast of Brazil and is currently in discussion with PetroBras to develop a long-term strategic partnership.

Nigerianofficials say they are prepared to use force against militants if peace talks fail. The government is deploying troops into strategic positions in the Niger Delta region. Nigeria's oil production has now fallen behind Angola's. The militants maintain they want a greater share of Nigeria's oil wealth to go to the impoverished Niger Delta region and have refused to take part in peace talks unless international mediators are involved.

Iran is regaining market share much faster than expected since sanctions were lifted in January. Exports to Asia have jumped over 47% from last year. South Korea, China, India and Japan are Iran's biggest customers but the country is also providing discounts for new customers, undercutting neighbouring Saudi Arabia and Iraq.

US IMPORTS OF CANADIAN CRUDE

million bbl/day  preliminary data by EIA

US OIL INVENTORIES

million bbls  data by EIA

US OIL PROD'N & RIG COUNT

million bbl/day  data by EIA & Baker Hughes

2,725k

-124 ▼ 4.4%BBL/D CDN IMPORTS TO US

8,515k

+21 ▲ 0.2%BBL/D US PROD'N

521.1M

+1.7 ▲ 0.3%BBL US INVENTORY

374

+3 ▲ 0.8%US RIG COUNT

CHANGE WK/WK &nbsp

The US Energy Information Agency (EIA) reported that Canadian oil imports into the US declined 4.4% for the week ending July 22nd, falling to an estimated 2.725 million bbl/day. The 4-week average now sits at 2.767 million bbl/day, almost 20% lower than the highs of January.

Rig counts ticked up on both side of the border. US rig counts have risen for the past 5 consecutive weeks. US production has been rising lately due to recovering production from Alaska. However, production in the lower 48 states continues to decline.

CURRENCIES  WEEKLY CLOSE

Friday close  data by Bank of Canada & ICE

95.49

-2.03 ▼ 2.1%USD INDEX

76.59

+0.52 ▲ 0.7%CDN DOLLAR

1.46%

-0.11 ▼ 7.0%US 10Y Bond

1.03%

-0.06 ▼ 5.7%CDN 10Y Bond

CHANGE WK/WK &nbsp

The Japanese yen shot up 4% this week on lack of action from the Bank of Japan, much to the dismay of government officials desperately trying to fight deflation by devaluing their currency. The strengthening yen and weak US economic data deflated the US dollar this week, falling 2%.

UK 10 year bond yields fell to an all-time low. The Bank of England is expected to cut the overnight lending rate to 0.25% next week. Eurozone GDP fell to +0.3%, about half the expected growth rate. Despite low commodity prices and dismal economic data, most currencies rallied this week (including the loonie) on USD weakness.

OIL PRICES  WEEKLY CLOSE

Friday close, USD/bbl  data by CME Group

42.46

-3.23 ▼ 7.1%BRENT USD/BBL

41.60

-2.59 ▼ 5.9%WTI USD/BBL

37.35

-2.39 ▼ 6.0%CDN LT USD/BBL

26.80

-2.74 ▼ 9.3%WCS USD/BBL

CHANGE WK/WK &nbsp

Oil prices entered into bear market territory this week, defined as a 20% decline from the highs. Brent and West Texas are down about 20% from the highs of early June. Western Canadian Select is down over 30% from the same period due to a strengthening Canadian dollar and widening heavy oil discount, which is now approaching US$15/bbl.

Natural gas prices perked up this week as inventories rose much less than expected, thanks to high demand and lower production.

Notable second quarter earnings in the Canadian energy patch . . .

TransCanada (TSX:TRP +0.5%) reported a 14.9% drop in Q2 profits due to costs related to its US13 billion acquisition of Columbia Pipeline. Net income fell to $365 million, down from $429 million for the previous year quarter. Q2 revenues rose 4.6% to $2.75 billion. The company has about $25 billion worth of near term projects on its books and has put various assets for sale in the US and Mexico. TransCanada expects to boost its dividend by up to 10% a year through 2020. The company is also in the process of launching a "low cost pipeline" service to help Western Canadian natural gas producers better compete with US shale gas.

CN Rail (TSX:CNR -0.6%) reported lower earnings in the second quarter on a sharp decline in energy-related commodities. Petroleum and chemicals shipments fell 16%, metals and minerals down 17% and coal transport declined 36%. CN also transported less frac-sand, drilling pipe and steel products. Net income declined to $858 million, down from $886 million in Q2/2015. However, the company expects volumes to improve through the end of the year. CN has recently issued US$650 million in new bonds to refinance its debt and buy back shares.

Prairie Sky Royalties (TSX:PSK -1.1%) reported a 33% decline in second quarter revenues, falling to $48.1 million. The company swung to a $5.7 million loss in Q2, versus a $24.1 million gain in the previous year quarter. Prairie Sky owns over 7.7 million acres of royalty lands which produced 23,158 boe/day in the last quarter.

Canadian mining giant Teck Resources (TSX:TCK/B +3.1%) reported a surprise quarterly profit of $15 million on lower operating costs. Revenue declined 13% to $1.74 billion. Teck spent $231 million on their 20% stake of the Fort Hills Oil Sands Mine in Q2, slightly higher than planned due to a weaker Canadian dollar.

Heavy oil producer Baytex Energy (TSX:BTE -10.8%) reported a net loss of $86.9 million in the second quarter. 2016 average operating expenses fell 12% to $9.42/boe versus the same period last year. Q2 quarterly production declined 17% y/y to 70,031 boe/day. However, third quarter production should improve since the company is in the process of fully restoring 7,500 boe/day of heavy oil production shut-in earlier this year due to low oil prices.

Bonavista Energy (TSX:BNP -9.7%) reported a $101 million net loss in the second quarter on a 38% decline in operating revenues. Q2 total production declined 8% to 67,561 boe/day, blamed on a 25% decline in oil production and 16% drop in natural gas production. However, NGL production rose 30% to 17,027 bbl/day. CEO Glenn Hamilton will retire from Bonavista effective August 1, 2016.

Service provider Calfrac Well Services (TSX:CFW -7.8%) reported a second quarter loss of $41.7 million on revenues of $150.6 million, down 53% y/y. The company remains optimistic that business activity will improve next year but the economic outlook is uncertain in the short term.

SECURE Energy Services (TSX:SES -10.4%) reported a net loss of $20.7 million on revenues of $268.6 million (down 25% y/y). The company remains cautiously optimistic that activity in the energy patch will eventually improve through the end of the year and plans to increase capacity across its business units.

Notable second quarter energy earnings in the US . . .

ExxonMobil (NYSE:XOM -5.4%) reported an unexpected 59% slide in quarterly profits, sinking to just US$1.7 billion in Q2. Part of the earnings miss was blamed on curtailed production in Canada, Nigeria and weak downstream refining margins. Capital expenditures are down 38% from last year, falling to US$5.16 billion. Total production was unchanged at about 4 million bbl/day.

ConocoPhillips (NYSE:COP +0.15%) reported a bigger-than-expected loss of US$1.07 billion in the second quarter, down from a loss of US$179 million for the previous year. Q2 production came in better-than-expected at 1.546 milion boe/day. Phase G at its Foster Creek thermal in-situ facility produced first oil in Q2 while production at the Surmont SAGD facility is back to normal after being shut down in May due to the Alberta wildfires. The company has committed to further belt-tightening, laying off another 1,000 employees by year-end and further reducing its 2016 capital budget from US$5.7 to US$5.5 billion.

Chevron (NYSE:CVX -3.0%) reported its largest quarterly loss in 15 years, but the numbers were actually not as bad as expected. A big part of the loss was an unexplained US$2.8 billion impairment charge. The company declared a US$1.5 billion loss in Q2, versus a profit of US$571 million for the previous year quarter. Revenues declined 27% to US$29.3 billion. Total production rose to 2.53 million boe/day in the second quarter, up 2.7% from a year ago. Chevron is expected to complete several major projects in the next few years which will boost production and lower capital expenditures.

Independent refiner Valero Energy (NYSE:VLO +4.8%) reported a second quarter profit of US$814 million, slightly better than analysts were expecting. Revenues declined 22% from last year on a sharp drop in refining margins. Valero operates 15 refineries (including the Jean Gaulin refinery in Quebec) with a total refining capacity of about 3 million bbl/day.

Marathon Petroleum (NYSE:MPC +4.2%) reported a modest 3% decline in quarterly profits blamed on lower refining margins, primarily in the Gulf Coast. Net income fell to $801 million for the second quarter from US$826 million a year earlier.

Delaware-based Whiting Petroleum (NYSE:WLL -9.9%) posted a wider than expected quarterly loss of US$301 million on lower production and weaker crude prices. Production fell 22% y/y to 12.2 million boe/day.

Notable international second quarter results . . .

Earnings at Royal Dutch Shell (LSE:RDS.A -2.0%) fell to an 11 year low this past quarter, coming in much lower than expected. Profits sank 72% on low oil prices, weak refining profits, outages in Canada and Nigeria and charges from its US$54 billion acquisition of BG Group. Q2 oil and gas production rose 28% y/y thanks to added volumes from BG assets. Cash flow from operating activities was cut to US$2.3 billion, versus US$6.1 billion for the same quarter last year. CEO Ben Van Beurden has promised to cut spending and defer more projects if oil prices stay below US$50/bbl.

Second quarter earnings at BP (LSE:BP +0.05%) took a big hit from weak refining margins and a US$10.7 billion charge for the Deepwater Horizon disaster. Q2 losses widened to US$5.8 billion, versus a loss of US$583 million in Q1/2016 and US$1.4 billion in Q2/2015. Production for the quarter was 2,090 million boe/day, 1% lower than Q2/2015. Upstream profitability improved considerably while the downstream business remains under pressure due to narrowing crack spreads. The company expects significant turnaround activity into the third quarter and continued weakness in refining margins.

French energy giant Total (NYSE:TOT +1.4%) reported an unexpected net profit of $2.1 billion, a 17% decline from last year. The company produced 2.424 million boe/day in the second quarter, a 5% increase from the previous year. Outages in Canada and Nigeria shaved about 2% off their quarterly production numbers. CEO Patrick Pouyanné credits the company's cost cuts for the better-than-expected results. Capital expenditures for full year 2016 are expected to range between $18 and 19 billion, slightly lower than initially estimated.

UPGRADES

CN Railway (TSX:CNR): Upgraded from Market Perform to Outperform at Raymond James Financial. The company increased its price target from $82 to $92.

Encana (TSX:ECA): Upgraded from Market Perform to Ouperform at FirstEnergy.

Paramount Resources (TSX:POU): Upgraded from Sector Perform to Outperform at Scotiabank. The company increased its price target from $11.50 to $16.